Above The Fray

Simple But Not Easy

In May, I was invited to speak at the Value Investor Conference in Omaha on the day before the Berkshire Hathaway Annual Meeting. The conference was organized by Robert Miles, who has written three books about Warren Buffett and Berkshire Hathaway. The CFA Society of Nebraska sponsored one of the events at the conference as well. Lauren Templeton, the great niece of Sir John Templeton, was one of the other featured speakers on the conference agenda. As many of you know, Sir John Templeton, who passed away in 2008 at the age of 95, was a legendary global value investor and one of my investment heroes. Lauren is the only member of the Templeton family to follow in Sir John’s footsteps and manage money professionally. She has also written an excellent book about his investment techniques entitled “Investing the Templeton Way”.

During her presentation, Lauren discussed the difficulties investors face psychologically when attempting to follow that age old wisdom about the importance of buying low and selling high. Of course, her great uncle was extremely skilled at doing this and he became well known for articulating the following rule, “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”. While just about everyone intuitively grasps this essential concept, for most people it is simple to state in theory but not so easy to do in practice.

Lauren used the example of retired money manager Peter Lynch to illustrate this point. Peter Lynch was the portfolio manager of the Fidelity Magellan Fund from 1977 to 1990. Over that 13 year span, he delivered an annualized return of 29% compared to an annualized return of 15.5% for the S&P 500 over the same time period. Clearly these were sensational results, both absolutely and relatively. In fact, he had the top performing equity mutual fund in the United States over that time span. However, despite this excellent track record, an analysis by Fidelity showed that the average Magellan Fund investor during Peter Lynch’s tenure realized a return of less than 5% and a large percentage actually lost money!

How could this happen? Lauren explained that this occurred because large numbers of investors would purchase Magellan Fund after it had experienced a short term period of excellent performance only to sell out later after a period of poor short term performance. Clearly, such investors did not buy low and sell high. In fact they did the opposite! There is something in the behavioural hardwiring of most people that makes it very difficult for them to buy low and sell high despite the almost unanimous agreement about the importance of doing so.

Sir John Templeton spent over half a century as a professional money manager. His track record was superb in no small part because of his ability to control his emotions and to maintain a temperament that allowed him to buy at the point of maximum pessimism. In her presentation, Lauren Templeton commented that her great uncle utilized the same principles in allocating capital to others later in his life after he retired as professional money manager. She cited several examples of Sir John placing his capital with managers he respected with excellent long term records but who were suffering through periods of poor short term performance. In other words, he liked to buy at the point of maximum pessimism! I know that this is simple to say and not so easy to do. If examining the life and career of Sir John Templeton teaches us anything, it is that mastering this principle is one of the most important things you can do to ensure your own long term investment success. So let me end by asking you two questions……. Do you know of a professional money manager with a good long term track record who has recently experienced a period of poor short term performance? Do you want to buy at the point of maximum pessimism?

“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation.